Rosenberg: Economic activity in line with assessment

Deputy Governor Irma Rosenberg spoke today at a seminar organised by the Swedish Society of Business Economists (SIMRA) on the subject "The economic outlook for Sweden".

"In the June Inflation Report, the Riksbank concluded that there had been a gradual deterioration in both Swedish and international economic conditions during the spring. This led us to present a somewhat gloomier economic outlook compared with previous assessments, characterised by a weaker, more protracted recovery. In the light of the subsequent repo rate cuts of 0.75 percentage points to 2.75 per cent and increasing signs over the summer of a revival, both in Sweden and abroad, I am now more optimistic than in June about economic conditions," said Mrs Rosenberg.

"If we look at international economic developments during the summer, the outlook in the US is now somewhat brighter than in June. Preliminary national accounts figures for the US economy during the second quarter pointed to relatively fast growth in domestic demand. Monetary policy is accommodative and a new fiscal package was adopted in the US during the summer, which is expected to have some stimulatory effect on household consumption in particular. However, this effect could be dampened somewhat by the weak labour market. While the number of positive economic signals emanating from the US has been increasing, uncertainty remains about the European outlook. It has indeed been possible to discern increasing optimism among firms, but this is still fragile. The German government has presented proposals aimed at improving the functioning of the economy, although it remains to be seen whether they will have the support of the German parliament. Let me also say something about equity prices on the major exchanges, which rallied in March and continued to rise over the summer. So far, it appears that the improved earnings outlook has been mainly due to corporate rationalisation and not so much to stronger economic activity. If the positive equity market trend is to last, however, a sustained recovery in demand will be necessary," said Mrs Rosenberg.

"In the June Inflation Report, we concluded that a gloomier outlook for the international economy would subdue demand in Sweden, thus resulting in lower resource utilisation. Inflation was forecast to be clearly below the Riksbank's target of 2 per cent over the coming 1-2 years, even excluding energy prices. This provided scope for a substantial cut in interest rates. The Riksbank lowered rates first by 0.5 percentage points in June and by a further 0.25 percentage points at the monetary policy meeting in July, giving a total of 0.75 percentage points. New data received since June has pointed to somewhat stronger growth in Sweden during the first half of the year compared with the June assessment. In addition to the repo rate cuts, these data contributed to a somewhat brighter outlook for the Swedish economy by the time of the monetary policy meeting in August. Given that inflation was forecast to be around the target, the Riksbank decided to leave the repo rate unchanged. At the same time, we concluded that the outlook presented by different economic indicators was mixed. The quarterly business tendency survey of the National Institute of Economic Research in July, for example, indicated a deterioration in manufacturing, continued weakness in construction and a slowdown in retail sales. The August survey, however, pointed to some improvement in manufacturing compared with the previous month, although the outlook for construction remained gloomy," said Mrs Rosenberg.

"All in all, I believe that economic activity so far is in line with the assessment we presented at the most recent Executive Board meeting in August. It now remains for us to monitor incoming data until the October Inflation Report, in which we will provide a more comprehensive assessment of the economic outlook and its implications for inflation over the coming 1-2 years," concluded Mrs Rosenberg.